Cross-Border Data, Rising Risks: How International Arbitration Can Help

The flow of data across borders is essential to our global economy. As companies grow more and more dependent on cross-border data transfers to conduct business, two parallel legal trends have emerged:

1. Increased Disputes: Litigation, contract disputes, and other legal proceedings resulting from data breaches, ransomware attacks, and other incidents focused on cross-border data privacy and cybersecurity are more frequent, more publicized, and more costly.
2. Increased Regulation: Powerhouse economies—including the United States, the European Union, and China—have crafted complex laws intended to hold entities accountable for safeguarding data they share across borders.

A key question for companies that rely on cross-border data transfers to conduct business is: how to manage the increased risk of a dispute? The above trends have ballooned legal, financial, and reputational risks for companies that regularly engage in cross-border data transfers. They must factor in these risks in negotiating the underlying agreements and their specific terms—particularly when crafting the dispute resolution clause. Companies at this stage should consider the strategic inclusion of an international arbitration clause. International arbitration offers several advantages over traditional litigation to help companies minimize the unique risks posed by cross-border data transfers and any resulting data privacy and cybersecurity disputes and position themselves for a favorable outcome.

What is international arbitration?

International arbitration is an alternative method of resolving disputes between cross-border parties outside traditional court systems. A contract, treaty, or host-country legislation is typically the source of dispute resolution mechanism. Arbitration proceedings are decided by an arbitrator or panel of arbitrators (usually three), appointed by the parties to the underlying agreement. A key benefit of international arbitration is that it provides autonomy to the parties to decide the dispute resolution mechanism that best suits them and the subject matter.

While the parties may agree to resolve their disputes through ad hoc arbitration—conducted without institutional rules or oversight—arbitration is often administered by arbitral institutions under established and well-used rules, such as the International Chamber of Commerce International Court of Arbitration (ICC), the American Arbitration Association’s International Centre for Dispute Resolution (AAA-ICDR), and the International Centre for Settlement of Investment Disputes (ICSID).  

The result of arbitration is a binding, enforceable, and—subject to the parties’ agreement—often confidential award. The enforceability of the award in every major jurisdiction in the world can be a key benefit if the parties operate internationally and want a dispute mechanism that is also international in scope. Arbitral awards can be enforced in any of the 173 countries that are parties to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention, including the United States. In other words, a party that has secured a successful arbitral award can apply to a court in any signatory of the New York Convention for recognition and enforcement of its award.

Advantages of international arbitration for resolving cross-border data transfer disputes

Disputes over data are often highly technical, focus on sensitive content, and can be commercially damaging or embarrassing for the companies involved. International arbitration provides tools that are particularly advantageous to parties involved in cross-border disputes regarding data privacy or security, including:

• Enhanced Confidentiality. Unlike court proceedings, which are generally public, parties have wide latitude to keep international arbitration proceedings confidential. This means sensitive details about intellectual property, trade secrets, data security practices, or exploitable vulnerabilities involved in the dispute are kept out of the public record, protecting business information and minimizing publicity.
  
  Practice Example: In a dispute concerning the failure of a company's encryption during a data breach, confidential arbitration can hinder threat actors, geopolitical adversaries, regulators, competitors, or the public from gleaning sensitive information as they could from public court filings.

• Choice of Decision-Maker. Judges in domestic litigation are, by nature, generalists experienced in a wide range of matters but may not always have the specialized expertise required to meaningfully engage with data classification, cybersecurity standards, or other issues common to cross-border data disputes. Parties to arbitration can select an arbitrator or a panel of arbitrators who have specific technical knowledge or legal expertise in data privacy, cybersecurity, and other relevant fields. This selection process ensures that the decision-maker comprehends not only the law governing the dispute, but also any technical facts that are often critical to fair outcomes.
  
  Practice Example: In a dispute centered on whether a European firm’s cloud security configurations met relevant cloud security standards like ISO/IEC 27017:2015, the parties could select an arbitrator who is an expert in cloud architecture, technical standards, and European data protection law, leading to a more informed and predictable decision.

• Choice of Forum/Choice of Law. Parties can agree to hold the arbitration in a neutral venue and potentially select which country's laws will apply to the dispute. This avoids the risk of facing litigation in a foreign court system that might be unfamiliar or perceived as less favorable, offering more predictability for complex international data transfer issues.
  
  Practice Example: An American technology company and a European business partner involved in a dispute over data processing obligations could choose to arbitrate in a neutral location under agreed-upon governing law, avoiding potential home-court advantages or unfamiliar legal processes in either the US or the partner's home country.

• Choice of Governing Procedures. Arbitration allows the parties to customize the process by setting rules for evidence, discovery, and timelines that are tailored to the needs of the parties and the nature of the dispute. This flexibility can make the process more efficient and better suited to handling voluminous, complex technical evidence compared to the rigid procedures of traditional courts. Specifically, international arbitration can help avoid—or narrow—the often burdensome and time-consuming discovery process typical of litigation, which is often lengthy and expensive.
  
  Practice Example: Parties in a dispute over unauthorized system access could agree on specific protocols for presenting complex digital forensic reports or limit extensive pre-trial discovery common in courts, focusing only on the essential technical evidence needed to resolve the core security issue more quickly. In this context, arbitration parties typically rely on Redfern schedules to streamline document production. This process is designed to focus on the exchange of the evidence that is directly relevant to the parties’ claims, helping to avoid unnecessary or overly broad discovery, often known as fishing expeditions.

Takeaways

Companies that engage in large-scale cross-border data transfers should consider including an international arbitration clause in relevant agreements to mitigate the legal, business, and reputational risks discussed above. However, this mitigation will only be effective if the arbitration clause and related provisions are drafted by counsel with a deep understanding of both the mechanics of international arbitration and the nuanced privacy and cybersecurity issues poised by the flow of data internationally. In our next alert, we will explore real-life arbitral decisions involving disputes over cross-border data transfers and related issues and discuss lessons learned from the decisions and the agreements underlying the disputes.

The authors would like to thank summer associate Bryan Dewan for his contributions to this article.